Money Expert: We’ll Be in Recession By End of Year

A respected economic expert is warning that a recession is definite by December and that U.S. stock prices are going to plunge, thanks to Federal Reserve strategies and the soaring price of crude.

John Taylor, founder of the FX Concepts hedge fund and former vice president at Citibank, says the U.S. economic recovery has taken place thanks in large part to the Federal Reserve's money printing campaign, known as quantitative easing, which ends in June.

"Recovery has never really gotten off the ground. It's all government stimulated," Taylor tells CNBC. "We'll be in a recession by the end of the year."

Oil prices continue to rise, thanks in part to a cheap dollar, which will further hamper economic recovery, Taylor said.

Meanwhile, the cost of living in the U.S. rose in March for a ninth consecutive month, led by increases in food and fuel costs that have yet to filter down to other goods and services.

Further oil price hikes could do serious damage to the U.S. economy, Oil Price Information Service chief oil analyst Tom Kloza recently told The Associated Press.

For consumers, "gas prices have more relevance on an emotional level than a lot of other things that they pay for," Kloza said. "People pay more attention to gasoline than phone service, cable TV or other services.”

Kloza said it may not be long before the national average tests the all-time record of $4.11 per gallon set in July 2008.

Those warnings are being echoed by Mark Zandi, chief economist at Moody's Analytics.

"The surge in oil prices since the end of last year is already doing significant damage to the economy," Zandi told the AP.

Another economic expert isn't as adamant in insisting that a new recession is guaranteed, but he says the specter is very real. And even if high oil prices don't trigger another recession, they'll dampen economic growth, says Martin Feldstein, former chairman of the Council of Economic Advisors.

"It certainly could happen," Feldstein tells CNBC when asked if a recession were possible. "It is certainly not the most likely outcome, but I think continued low growth held down by things like the high level of energy prices could give us a number much closer 2 percent (GDP) than the kind of 4 percent number that's being forecast — and it could be south of 2 percent."

But while oil prices are a problem for consumers in the United States and abroad, the Federal Reserve isn't to blame, Feldstein says.

Monetary authorities have kept interest rates low and are printing money in order to spur more robust economic activity, which weakens the dollar and sends investors racing to oil as a hedge.

Yet basic supply and demand is the culprit, Feldstein says.

"I think the strong demand in some places for oil like China and then all of the problems in the Middle East raise great uncertainties about what our oil supply is going to be worldwide," Feldstein says.

Nevertheless, soaring oil prices are acting like a tax on consumers here.

"The U.S. imports 4 billion barrels of oil a year, so a $40 increase in the price of oil, which is what we've seen since last year, that's $160 billion that American consumers are turning over to oil producers outside this country," Feldstein says.

"That's 1 percent of GDP, so it makes the fiscal discussion about $38 billion or $60 billion or $20 billion — those are small numbers in comparison to the $160 billion tax that the oil producers have put on us."

Meanwhile, the Consumer Price Index rose 0.5 percent in March, the Labor Department said Friday. That matched February's increase, the largest since the recession ended in June 2009. In the past 12 months, the index has increased 2.7 percent, the biggest rise since December 2009.

Excluding the volatile food and gas categories, the so-called core index rose 0.1 percent and it is up only 1.2 percent in the past year.

Consumers are spending more, but the steep rise in food and gas prices could limit their ability to purchase discretionary goods and services. Consumer spending makes up 70 percent of economic activity.

Rising inflation has caused many analysts to reduce their estimates for economic growth in the January-March quarter from roughly 3 percent or higher to as low as 1.5 percent.

Gasoline jumped 5.6 percent last month and has risen nearly 28 percent in the past year. Consumers paid an average price of $3.81 a gallon nationwide on Friday according to the travel group AAA.

Manufacturers, food processors and other producers are facing higher costs for oil, grains and other commodities. But only some of those increases are reaching the consumer. Many retailers are reluctant to pass on the higher prices for fear of losing price-conscious customers.
Consumers have seen wages and salaries stagnate in the past year, limiting their ability to pay more for many goods. According to a separate government report Friday, average hourly earnings for all employees, adjusted for inflation, dropped 1 percent in the past 12 months.

Stagnant wages are a big reason that most Federal Reserve policymakers say the spike in gas and food will have only a modest and temporary impact on inflation.

But a top Federal Reserve official said he expected commodity prices to stabilize and have a minimal effect on underlying U.S. inflation trends, even if costly fuel did put a dent on household budgets, Reuters reported.

Dennis Lockhart, president of the Atlanta Federal Reserve Bank, said historically, prices for industrial commodities "have tended to exert a relatively small effect on most consumer prices."

"This is not to say there will be no pass-through effect on inflation. The point is the effect is likely to be muted."